PG&E Corporation 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015. The combined filing covers PG&E Corporation, a holding company, and Pacific Gas and Electric Company, its regulated Northern and Central California utility subsidiary. The financial statements are unaudited and prepared under U.S. GAAP.
Financial Performance and Position
| PG&E Corporation consolidated | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenues | $4,217 million | $3,952 million | $8,116 million | $7,843 million |
| Operating income | $687 million | $518 million | $758 million | $1,002 million |
| Net income | $406 million | $271 million | $440 million | $501 million |
| Income available to common shareholders | $402 million | $267 million | $433 million | $494 million |
| Diluted EPS | $0.83 | $0.57 | $0.90 | $1.06 |
- Q2 operating margin was approximately 16.3%, compared with 13.1% in the prior-year quarter. Six-month operating margin was approximately 9.3%, compared with 12.8% in the prior-year period.
- Q2 net margin was approximately 9.6%, compared with 6.9% in Q2 2014. Six-month net margin was approximately 5.4%, compared with 6.4% in the prior-year period.
- Q2 revenue increased 7%, while income available to common shareholders increased 51%. Six-month revenue increased 3%, but income available to common shareholders decreased 12%.
- At June 30, 2015, PG&E Corporation had $249 million of cash and cash equivalents, $287 million of restricted cash, $1.016 billion of short-term borrowings, and $15.544 billion of long-term debt.
- Total assets were $61.631 billion and total equity was $16.271 billion at June 30, 2015, compared with $60.127 billion and $16.000 billion, respectively, at December 31, 2014.
- Six-month cash flow from operating activities was $1.859 billion, compared with $1.280 billion in 2014. Capital expenditures were $2.410 billion, producing net cash used in investing activities of $2.486 billion. Financing activities provided $725 million.
- The Utility reported $148 million of cash and cash equivalents, $1.011 billion of short-term borrowings, and $15.194 billion of long-term debt at June 30, 2015.
- The Utility had approximately $1.956 billion available under its $3.0 billion revolving credit facility; PG&E Corporation had $295 million available under its $300 million facility. Both companies were in compliance with applicable covenants.
Material Changes Versus the Prior Comparable Period
- Operating revenues benefiting earnings increased $317 million, or 15%, in Q2 and $551 million, or 13%, for six months, primarily from higher base revenues authorized in the 2014 general rate case and related transmission and nuclear decommissioning revenues.
- Operating and maintenance expense increased $60 million in Q2 and $614 million for six months. The increases primarily reflected $75 million and $628 million, respectively, of charges associated with the CPUC Penalty Decision.
- Depreciation, amortization, and decommissioning expense increased 17% in both Q2 and the six-month period, primarily due to higher authorized depreciation rates and capital additions.
- Cost of electricity decreased to $1.277 billion in Q2 and $2.277 billion for six months, compared with $1.349 billion and $2.559 billion, respectively, in the prior-year periods. Natural gas costs declined to $118 million and $392 million from $200 million and $560 million.
- The six-month effective tax rate declined to approximately 5% from 31%, reflecting flow-through treatment of certain tax deductions and the effect of the Penalty Decision.
- PG&E Corporation’s share count increased, with 479 million basic weighted-average shares for six months versus 463 million in 2014. Management expects further equity issuance, which could dilute EPS.
Guidance, Outlook, Risks, and Unusual Items
- The CPUC approved a Penalty Decision imposing $1.6 billion of penalties and remedies: a $300 million state fine, a $400 million customer bill credit, $850 million for future pipeline safety projects and programs, and at least $50 million of remedial measures.
- At June 30, 2015, cumulative Penalty Decision charges were $848 million. The company recorded $300 million for the state fine and $400 million for the customer bill credit; future anticipated financial impact was estimated at $752 million, subject to the ultimate treatment of qualifying costs.
- The Utility expects to pay the $300 million fine during 2015 and provide the $400 million customer bill credit in 2016. At least $688.5 million of the $850 million safety obligation must be capital expenditures excluded from rate base.
- The 2015 Gas Transmission and Storage rate case requests a $555 million increase in annual revenue requirements. Management stated that no increase is likely to be recognized in 2015; a decision is expected in 2016, with the proceeding expected to be completed by December 2016.
- Management forecasts approximately $5.5 billion of 2015 capital expenditures and $5.3 billion to $5.8 billion in 2016.
- PG&E Corporation forecasts issuing $700 million to $800 million of common stock during 2015, primarily to fund Utility equity contributions, unrecovered pipeline costs, and Penalty Decision obligations.
- The Utility forecasts $100 million to $150 million of unrecovered pipeline-related expenses in 2015, primarily for identifying and removing encroachments from transmission pipeline rights-of-way.
- The Utility faces a federal criminal prosecution involving 28 counts related to alleged pipeline safety and NTSB investigation violations. The indictment alleges maximum statutory fines of $14 million and an alternative fine of approximately $1.13 billion. No criminal fine has been accrued because management does not consider it probable.
- Other risks include CPUC investigations of safety recordkeeping, potential improper communications with CPUC personnel, a potential safety-culture investigation, environmental remediation, tax audits, changing renewable-energy and distributed-generation policies, customer-demand reductions, financing access, credit ratings, cyber threats, and commodity-price volatility.
- Environmental remediation liabilities were $958 million at June 30, 2015, with approximately $676 million expected to be recoverable through ratemaking mechanisms. Undiscounted environmental costs could reach as much as $1.8 billion under adverse assumptions.
- The Utility entered into additional renewable energy and other power purchase commitments of approximately $465 million over the next 25 years during the first six months of 2015.
Most Important Facts for Investors to Verify
- Verify the final CPUC determinations in the 2015 Gas Transmission and Storage rate case, including revenue recovery, ex parte penalties, and the allocation of the $850 million safety obligation.
- Track cash payments and future charges related to the $300 million fine, $400 million customer credit, remedial measures, and disallowed pipeline safety spending.
- Assess the outcome and potential financial exposure from the federal criminal prosecution and continuing state and federal investigations.
- Monitor PG&E Corporation’s planned equity issuance, Utility equity contributions, and the resulting EPS dilution.
- Compare actual capital expenditures, operating cash flow, debt issuance, and liquidity with management’s 2015 and 2016 forecasts.
- Review environmental remediation estimates, particularly the Hinkley and Topock sites, and the extent of recoverability through rates or insurance.
- Evaluate the sustainability of earnings excluding unusual Penalty Decision charges, regulatory timing effects, tax timing, and insurance recoveries.